$MINomics Research Part 2: Introducing Dynamic Emissions Schedule

Exploring the History of Emissions Schedules for DEXs, and why a new and innovative approach might be a better way going forward.

It’s been a bit more than a month since our first Part of this series: $MINomics Research Part 1: Exploring Tokenomic Models and Revenue Sources. Since then, we have implemented some of the ideas mentioned in that article such as distributing $ADA staking rewards to LPs, or starting the first Launch Bowl initiatives to increase the DAO Treasury’s POL, with about 1.6 million $ADA supplied to the Mocossi LBE!

While we continue on the path to implement more of these concepts related to the $MIN Token and its Revenue Sources, there is a need to reflect and act on another very important aspect of the Minswap DEX: the $MIN Yield Farming Emissions Schedule. In this article, we want to explore the background of what Farming Emissions Schedules for DEXs are, why they are the way they are, and why we might want to follow a different path than the traditional one for the upcoming $MIN Yield Farming Emissions Schedule.

This article is structured in the following way: first, we go over some background on traditional Emissions Schedules for DEXs; secondly, we dive into what a Dynamic Emissions Schedule is, what it’s aimed at and what inputs could be taken for one; thirdly, we go over the steps forward regarding how $MIN Emissions could be determined in the foreseeable future.

Background — Diving into Emissions Schedules

When the Minswap DEX was first launched, a pretty aggressive schedule was chosen to attract TVL (Total Value Locked) and reward early supporters. The first $MIN Emissions Schedule (ending in just 4 days) is the following:

• 1st month (16th March 2022 to 15th April): 1.2% total supply = 60 million MIN ≈2,000,000 emitted daily.
• 2nd month (15th April 2022 to 15th May): 1.1% total supply = 55 million MIN ≈1,833,333 emitted daily
• 3rd month (15th May 2022 to 14th June): 1% total supply = 50 million MIN ≈1,666,666 emitted daily.
• 4th month (14th June 2022 to 14th July): 0.9% total supply = 45 million MIN ≈1,500,000 emitted daily.
• 5th month (14th July 2022 to 13th August): 0.8% total supply = 40 million MIN ≈1,333,333 emitted daily.

This type of schedule where rewards vest linearly and there is a “halving” every 6 months or so is very common. For example, Raydium, a popular DEX on Solana, describes their Farming Schedule the following way: “Emissions will last for approximately 36 months, with halvenings occurring every six months.” Similarly, Trader Joe (the largest DEX on Avalanche) also has a Farming Schedule where Emissions last 3 years and there is a halvening approximately every 6 months. Other more conservative DEXs such as Pangolin on Avalanche, can have rewards distributed over 4 years, but instead of halvenings, the rewards are given in a pretty linear manner over those 4 years, decreasing very little every year that passes.

For some visuals, this is how a standard Emissions Schedule for a DEX looks like:

Example of Linearly Declining Emissions Schedule. Starting at 16.3 million tokens emitted per month, it declines by 250K a month for 48 months for a total of 500 million tokens. The blue line shows the total Emissions over the life of the protocol. The orange line shows the Emissions per month.

Now, if Fixed Emissions charts like these and terms such as “halvings” seem familiar, it’s because they should! They were inspired by Bitcoin, which needed such a supply schedule to always incentivise miners solving for the Difficulty algorithm. However, such Fixed Schedules do not seem to adapt well to the logic of a DEX: a DEX should emit tokens only when it needs to emit tokens and therefore should find a more thoughtful way to think about Emissions than leaving it up to a Fixed Schedule.

In particular, in a DEX, Emissions should be:

• Targeted: not only at increasing liquidity, but mainly at increasing LP fee generation. The target should also be not to “overspend” emissions in order to reach those goals and make them last as long as possible.
• Adaptable: to different market scenarios and conditions.

Fixed Schedules, while fitting for assets such as $BTC or $ADA, are not a great model for determining supply schedules for DEXs, since they are neither targeted nor adaptable.

So, is there a better way to determine Emissions than a fixed schedule?

Introducing — Dynamic Emissions Schedules

We think that there is! In very simple terms, it would be a Dynamic Schedule, meaning one in which Emissions in different time periods can go up or down, and are not fixed and tied to a stated and ever-declining schedule. The goal should be to not overspend Emissions for their aim (raising TVL, acquiring users, incentivizing trading volume, etc.), meaning finding a marginal point where removing any further incentives would directly affect such metrics.

In essence, every DEX needs deep liquidity, as that translates to low slippage, more people swapping, and hence more fees for Liquidity Providers. However, token Emissions to achieve such liquidity for a DEX can be thought of as an opportunity cost to the protocol. The aim of a Dynamic Emissions Schedule is to extend the lifespan of these Emissions, and have them last as long as possible while achieving a series of objectives. This idea of using $MIN Emissions as effectively as possible is the same one underpinning our $MIN Point System and the Formula that is used to determine how $MIN rewards are distributed across Liquidity Pools.

This chart shows a comparison of the TVL/Emissions ratio of a DEX with a Static Emission Schedule vs. one with a Dynamic one. As you can see, in this case, the Dynamic Schedule lasts an additional 38 months longer.

Now, we have established why a Dynamic Schedule seems to be a better model for scheduling $MIN Emissions. But, what does such a schedule look like in practice? Here are some ideas/examples of metrics and scenarios that could be factored into a Dynamic Emissions Program:

1. Market share of DEX TVL: monitoring and aiming to capture a % of total Cardano DEX TVL share.
2. Market share of DEX Volume: monitoring and aiming to capture a % of total Cardano DEX Trading Volume share.
3. Emissions/TVL: if TVL seems relatively static, it might be worth experimenting and lowering the amount of Emissions in order to have the length of the Emissions last longer. The aim should be to reduce the Emissions/TVL ratio without losing TVL market share.
4. Emissions/Trading Volume: this metric is representative of the efficiency of the deployment of Emissions. For example, if TVL is increasing, but Trading Volume is not, one could argue Emissions should be reduced.
5. Trading Volume per Circulating Coin (TVPCC): this metric would show the Trading Volume on the DEX per circulating $MIN.
6. Profit per Circulating Coin (PPCC): this metric would be the Trading Volume minus the Emissions deployed divided by the circulating $MIN.
7. Market scenarios: for example, perhaps a strong competitor DEX has stopped or drastically lowered their Emissions, it would be a good time to reduce Emissions to decrease the Emissions/TVL and Emissions/Trading Volume Ratios. If a new competitor DEX surfaces, or perhaps a new wave of Cardano DeFi users is onboarded, it might be a good time to increase Emissions.

Steps Forward — Minimax Phase

During the first 5 months after deployment of the DEX, Minswap went through a Bootstrapping Phase using a predictable and aggressive Yield Farming Schedule to bootstrap users and TVL. Now, it’s time to enter into a 4-month Minimax Phase with a Dynamic Schedule approach, an innovative method that will set the DEX on a more sustainable path. While at first this process will be conducted off-chain, the endgame of a Dynamic Schedule would be to have the Emissions Schedule be determined completely on-chain and for Emissions to be determined according to an algorithmic formula coupled with on-chain voting.

However, in order to get there, there is a need for extensive analysis and experimentation to try and validate our hypotheses and determine a more defined structure for a Dynamic Emissions Program/Formula going forward. Thus, the Minimax Phase for the Dynamic Schedule will last 4 months, after which there will be an Emissions Report detailing the evolution of the different metrics as well as the findings and conclusions.

During the 4 months of the Minimax Phase for the Dynamic Schedule, Emissions will be increased or decreased within a 50% threshold of the last Emissions Rate of the first Farming schedule, meaning the Starting Emissions Rate (SER) of ≈ 1,333,333 $MIN emitted daily from July 14th to August 13th. This means Emissions will be increased to a maximum rate of ≈1,999,999 $MIN daily, or decreased to a minimum rate of ≈666,666 $MIN daily. None of those two scenarios must or will necessarily occur, but those are the bounds set during the Minimax Phase. Once the Minimax Phase is over, with the first Emissions Report released, and provided Governance infrastructure is ready by then, the Minswap DAO will have to vote on whether to continue a Dynamic Emissions Path and if so, what structure to pursue within a Dynamic Emissions Path.

As in the previous $MINomics article, we have prepared the following Forum Post for the Minswap community to express their views on the topic of Dynamic Emissions Schedules. Feel free to contribute there or on the #💡┃ideas channel on our Discord!

Resources:

• Minswap Kitty Farmer and DeFi Gigabrain Marco elucidates Dynamic Emissions schedules and lays out a case study showing how they could be an improvement over Fixed Emissions Schedules here.
• Ava Labs Head of DeFi Luigi DeMeo goes over basic tokenomics concepts and introduces the idea of why Dynamic Schedules make sense here.
• Gauntlet elaborates on their approach towards optimizing Yield Farming Emissions for Sushiswap here.